DSL gains on cable modems for broadband Web access - Industry Trend or Event

Communications News, March, 2001 by Morris Edwards

Business platform for value-added services!

Squeezed by AT&T and other large cable operators on the one hand, and by aggressive DSL startups on the other, the normally slow-moving incumbent local exchange carriers (ILECs) have suddenly become aggressive in rolling out a variety of broadband Internet access services.

BellSouth, Qwest/US West, SBC Communications and Verizon Communications have all stepped up deployment of DSL services, aimed mainly at residential users but also targeted to small and midsized business customers.

BellSouth says it added 215,000 DSL customers during 2000 in the nine states it serves exceeding its expectations by 7.5%. Qwest claims to have ended 2000 with more than 255,000 DSL customers, more than double the previous year's total and above its year-end target of 250,000.

In January, SBC reported the best quarter for DSL growth in its history, adding 251,000 customers for a total of 767,000. Meanwhile, Verizon said it finished 2000 with 540,000 DSL customers, topping a year-end goal of a half-million.

In contrast, the DSL startups are going through a difficult period. NorthPoint Communications suffered a setback in late November when Verizon terminated its merger agreement, citing the deterioration in NorthPoint's business, operations and financial condition since the merger was announced on Aug. 7. The company laid off 250 people, or about 19% of its workforce, and filed a lawsuit against Verizon. Covad Communications has since laid off 800 of its 3,100 employees, while Rhythm NetConnections has idled 450 workers, or about 23% of its staff.

Despite the startups' current problems, IDC remains bullish on DSL service growth. With 2.3 million lines in service in the U.S. at year-end 2000, the number of DSL subscribers is currently about half the total for cable modems. These modems can offer faster rates than DSL, but their speeds can decline as more people log on to the shared cable network. DSL lines are not shared, but their speeds are limited by distance, restricting service to about 60% of the population that lives within three miles or so of the provider's central offices.

TO SURPASS MODEM USE

Based on its growth forecasts, IDC expects DSL residential and business customers to exceed the subscriber base for cable modems by as early as 2003. Residential use of the Internet and increasing work-at-home activity will drive much of the growth, but small businesses will also play a substantial role. IDC forecasts that small business DSLlines will jump from 742,000 at year-end 2000 to 3.8 million by 2004, when they will account for 15% of all DSL lines in the U. S. and more than 95% of all business DSLlines.

Unlike many residential customers, small businesses view DSL as more than a high-speed, always-on connection to the Internet. They see DSL as a secure, high-speed means of accessing a number of value added services, such as voice and video over DSL, managed firewall services and virtual private networks--all with the reliability they have come to expect for mission-critical, business-class access.

Until now, the competitive local exchange carriers (CLECs), such as Covad, NorthPoint and Rhythm NetConnections, have targeted small businesses, with the ILECs focusing on residential customers. Given the CLECs' current difficulties, however, the ILECs are likely to give more attention to the needs of small businesses in the coming months, and to garner a larger share of the market.

One of the most attractive services is likely to be voice over DSL (VoDSL), which provides up to 16 voice lines and a high-speed data connection over a single copper loop. Besides lowering costs, VoDSL allows small businesses to grow from eight to 16 voice lines, say, at the stroke of a computer key, rather than having to wait for the local carrier to provision more lines.

Despite the rosy forecasts for DSL, barriers do remain. DSL service providers must contend with rapidly changing standards, distance limitations, installation and provisioning challenges, competition from other broadband technologies, and a confusing array of incompatible DSL offerings (see sidebar, the "ABCs of DSL").

Standards activities received a boost last fall when major DSL vendors and service providers, including Cisco, 3Com, Qwest and SBC, launched the OpenDSL initiative. Their goals are to ensure interoperability between customer and carrier equipment and to improve service provisioning. The group is also working with another industry body, the DSL Forum, to drive the development of standards within the various technical committees.

One important standard awaiting ratification is G.SHDSL (see sidebar), which IDC expects to become the dominant business DSL service within three years. The prevalent residential service, ADSL, is also popular with small businesses, currently accounting for 45% of business DSL lines. IDC expects business use of ADSL to continue growing until 2002, when G.SHDSL will start to dominate.

CLOSER TO THE CUSTOMER

Vendors and service providers are also addressing the distance limitation with DSL service by moving termination equipment closer to customers. Last fall, Lucent Technologies introduced two Stinger remote terminals that can be deployed outdoors in cabinets instead of in telephone company central offices. The terminals may be deployed alone or with a digital loop carrier (DLC) system. Since DSL systems interrupt the copper loop from the central office, they normally block DSL service. Co-locating DSL remote terminals with DLCs allows the traffic to pass through.